I find it interesting what kind of life-goals different people have [if any]. Somewhere on the net (and presumably in reality) there's a great of people whose life goal is to sleep with as many women as possible. It seems like a purely quantitative goal. Much like trying to visit as many different countries as possible.
I guess my life goal(*) will be to generate the most interesting "resume" as possible... actually it's more to do as many interesting things as possible under my own idiosyncratic definition of what constitutes as interesting. I think "resume" defines the value-measure rather well. Playing cowboy as part of a lifestyle vacation might be interesting, but it's not resume-worthy unless you actually ran the tour. "Participated in ..." doesn't cut the cake.
Just some random thoughts.
Those who just want to travel are lucky. Everybody understands them.
(*) Actually, my life goal is to get my own wiki-page. This is, of course, sheer vanity.
In other news, thanks to the markets moving up 6 out of the last 7 weeks, my net worth just passed a nice "round fraction". I like to view my wealth in terms of more than just one variable though. I think the potential for increase is at least as important as how much I currently have. Right now we're in a position that's high but which has a lot of downside. Conversely, when I retired from physics in 2009, the markets we're in a position of being low but with a large upside. Hence, while I'm worth more than twice as much compared to when I retired (I deliberately positioned myself for a market recovery just as I deliberately picked stocks in sectors that were protected from the real estate bubble), I don't consider myself twice as wealthy. Wealth is how money shares you have. Money is just what they sell for.
(With job growth news combined with the sovereign debt news becoming old news we have the potential for a nice rally based on optimism. I think the market can go higher but there's no base for the optimism. Hence, I'm increasing cash. The next boom will be in commodities, but all equities are quite expensive now. Ideally the market index would go down due to a sovereign debt default (where having unleveraged liquidity is really great!!) and I would then buy shares in energy companies.)
On other news, I have developed an obsession with minimalism. Moving out of the RV actually meant that we lost an ungodly amount of storage space. Hence, we're still surrounded by cardboard crates until I can build: several bookcases, a sewing desk, and a workbench. When dealing with stuff, you an do either two things: Organize it or get rid of it. My preferred method is getting rid of it because then I don't have to think about organizing.
Fun fact: So after we bought a used couch+ottoman for $200 (delivery included), we (and they) discover that it's actually from Crate&Barrel(**) (new price $2100). While this is good news in terms of later resale (this should make our furniture cost NEGATIVE. Fun fact: the average American "family unit" spends $1800 on furniture EACH YEAR. Crazy!), it's a cursed situation since new slip covers are needed. The originals are $700!!! This leaves either a generic $30 spandex solution from Tarshay (not entirely classy---I'd do it to a cheap couch, because that would be fitting, but not on this one) or some DIY attempts. We'll attempt the latter first.
(**) It was basically a craigslist operation run out of Public Storage, so we went to look at what they had: "What about that one?" (seeing one that looked nice).. $160 ... and that's how we got lucky.
In terms of work I just calculated that I've read about 1000 pages worth of textbook material over the past month. I'm just about brain dead. This presents a slight problem on weekends when DW wants to do stuff and I'd rather sit and stare at the walls---much like after a one hour 85F hockey game with no subs.
Jacob's Journal
"Ideally the market index would go down due to a sovereign debt default (where having unleveraged liquidity is really great!!) and I would then buy shares in energy companies.)"
Hope, appears to be driving this market. Surprisingly, I actually think it can drive it further, as you suggested. Just wish Greece would default and get this over with.
"my life goal is to get my own wiki-page"
Awesome goal. I might have to add that to mine.
Hope, appears to be driving this market. Surprisingly, I actually think it can drive it further, as you suggested. Just wish Greece would default and get this over with.
"my life goal is to get my own wiki-page"
Awesome goal. I might have to add that to mine.
-
jacob
- Site Admin
- Posts: 16003
- Joined: Fri Jun 28, 2013 8:38 pm
- Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
- Contact:
I've been thinking a bit about the "social utility" of trading. Apparently, it's popular to question that first-order zero-sum game of trading as much as people never question the social utility of state lotteries (a negative sum game), fashion (a total waste), vastly overpowered desktop computers, or why actors, musicians, and athletes are paid tens of millions of dollars when it's not kosher when people in the financial or business world are. Yeah, sure football on ESPN is entertaining to many people, but so is Cramer on CNBC to other people.
However, inconsistent opinions aside ... what's the utility of trading? Very simple, it decreases the effort people have to spend looking for things they want to buy. Without traders, people would have to spend time searching for a seller. Given the existence of traders, one can just go to them.
Creating a market creates the social service of uniform pricing. Without uniform pricing, people would need to spend time searching for the best price for everything. As you all know, the retail market is not very efficient which means that spending effort often means you can get something cheaper. If your effort is worth less than your savings, you win, otherwise you lose.
In the stock market, trading means you don't have to spend time looking at different exchanges or for that matter hang around for hours or days looking for a cheaper offering. The market essentially creates a fair price at all time.
This creates two complaints:
1) Some people's time are worth far less than any cost. They'll spend hours or days to save $0.01. For this group, trading is evil because it essentially constitutes competition. They may use various loaded terms for traders (e.g. parasitic), but essentially they just don't like the competition. [Of course what this group should do is to become traders themselves.]
2) Some people are simply better traders than others. The slower/worse connected traders will complain about losing business to the faster and better connected traders. [This group just need to improve their craft. Protectionism doesn't help anyone in the long run.] For example, computer traders get a lot of flack from pit traders because the former are essentially doing a more efficient job.
So the social function of high frequency trading in particular is essentially to 1) create a more fair price for everyone---effectively, you get a narrower spread, that is, you pay less when buying or get more when selling 2) make it so that you don't need to sit on a limit order, you can just hit market and be done with it ... obviously we're not quite at that point yet, but that's the goal.
Of course as with everything there are white hats trying to improve the system and black hats trying to abuse the system(*). I aim to be a white hat.
(*) The sports equivalent would be the use of doping vs the non-use.
However, inconsistent opinions aside ... what's the utility of trading? Very simple, it decreases the effort people have to spend looking for things they want to buy. Without traders, people would have to spend time searching for a seller. Given the existence of traders, one can just go to them.
Creating a market creates the social service of uniform pricing. Without uniform pricing, people would need to spend time searching for the best price for everything. As you all know, the retail market is not very efficient which means that spending effort often means you can get something cheaper. If your effort is worth less than your savings, you win, otherwise you lose.
In the stock market, trading means you don't have to spend time looking at different exchanges or for that matter hang around for hours or days looking for a cheaper offering. The market essentially creates a fair price at all time.
This creates two complaints:
1) Some people's time are worth far less than any cost. They'll spend hours or days to save $0.01. For this group, trading is evil because it essentially constitutes competition. They may use various loaded terms for traders (e.g. parasitic), but essentially they just don't like the competition. [Of course what this group should do is to become traders themselves.]
2) Some people are simply better traders than others. The slower/worse connected traders will complain about losing business to the faster and better connected traders. [This group just need to improve their craft. Protectionism doesn't help anyone in the long run.] For example, computer traders get a lot of flack from pit traders because the former are essentially doing a more efficient job.
So the social function of high frequency trading in particular is essentially to 1) create a more fair price for everyone---effectively, you get a narrower spread, that is, you pay less when buying or get more when selling 2) make it so that you don't need to sit on a limit order, you can just hit market and be done with it ... obviously we're not quite at that point yet, but that's the goal.
Of course as with everything there are white hats trying to improve the system and black hats trying to abuse the system(*). I aim to be a white hat.
(*) The sports equivalent would be the use of doping vs the non-use.
Lotteries are only zero-sum if you don't include the state as a "player," which in my opinion they are. They take the risk that the jackpot will be hit over and over again.
Fashion is only a total waste if people get zero happiness out of pretty things, or if you place zero utility on happiness.
I don't know who you talk to, but I often hear complaints about how actors, musicians, and athletes are disgustingly overpaid.
Of course, I agree that traders have social utility.
Fashion is only a total waste if people get zero happiness out of pretty things, or if you place zero utility on happiness.
I don't know who you talk to, but I often hear complaints about how actors, musicians, and athletes are disgustingly overpaid.
Of course, I agree that traders have social utility.
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
"Apparently, it's popular to question that first-order zero-sum game of trading as much as people never question the social utility of state lotteries (a negative sum game), fashion (a total waste), vastly overpowered desktop computers, or why actors, musicians, and athletes are paid tens of millions of dollars when it's not kosher when people in the financial or business world are."
If there was a taxpayer funded bailout of those other industries, it would be popular to question them, too.
If there was a taxpayer funded bailout of those other industries, it would be popular to question them, too.
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
I think before the bailouts just about as many people complained about trading as people complain about other industries. I've seen plenty of people (and been one myself) criticize the exorbitant sums that athletes make, the ridiculous cost of designer brand clothing, and the supposed value of overpowered computers. Quantitatively, did more people complain about traders in 2006 thank baseball players' salaries? I'm not so sure. The Wall St./Main St. dichotomy didn't exist before 2008, to my knowledge.
Traders, financiers, and bankers are under the spotlight more now than ever before, and it's debatable whether that's justified or not.
IMHO, the American economy has been shifting toward debt-driven activity instead of production-driven activity, and that peaked in 2007. While traders may have some responsibility, the demand for high yields from high net-worth individuals combined with the artificially low yields on bonds, T-bills, etc. on the supply side mixed with declining wages to low net-worth individuals combined with skyrocketing medical and education costs on the demand side created a perfect storm for the explosion in debt-fueled consumption. I imagine many on this board would disagree with me, though.
Traders, financiers, and bankers are under the spotlight more now than ever before, and it's debatable whether that's justified or not.
IMHO, the American economy has been shifting toward debt-driven activity instead of production-driven activity, and that peaked in 2007. While traders may have some responsibility, the demand for high yields from high net-worth individuals combined with the artificially low yields on bonds, T-bills, etc. on the supply side mixed with declining wages to low net-worth individuals combined with skyrocketing medical and education costs on the demand side created a perfect storm for the explosion in debt-fueled consumption. I imagine many on this board would disagree with me, though.
-
jacob
- Site Admin
- Posts: 16003
- Joined: Fri Jun 28, 2013 8:38 pm
- Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
- Contact:
In my spare time I'm reading about cabinetmaking and hopefully also building a bit---although the inherent tendency to just intellectualize it is strong. So here's a fun thing I learned ... in the middle ages, people kept their possessions in chests. By the 16th-17th century, [rich] people had increased their possessions sufficiently to require a new kind of furniture called an armory. An armory is also called a wardrobe. It's interesting that when people discuss their clothing, they're really referring to a piece of furniture that had to be built to hold excess clothing.
Speaking of which ...
My wardrobe is almost converged.
I have
4 suits (gray and navy which are used all the time, a black which is never used, and a green one which was the first one I bought 15 years ago... it's very convenient to have stayed in the same shape since I was 17).
2 dress shirts
2 mock sweaters (nice)
1 pair of 501 jeans (I find it hugely convenient to go in and buy a pair that's good enough for casual and not have to try them on or anything ... I wear out a pair in 2 years ... they fail at the knee if I do a lot of bike/woodwork and below the backpocket if I sit on my ass too much.
1 pair of hiking pants (10 yeas old ... most expensive pair of pants ever)
1 black turtleneck
1 old blue sweater (dying)
1 gray wool sweater (nice enough to be dressy, warm enough to go on the ocean... this has died and been resuscitated several times)
1 hiking shirt (water proof ... same era)
2 technical shirts (hyper sweat transporting .. also old)
~ 10 pairs of underwear and 10 pairs of socks.
3 free tshirts (they need to go)
1 fuzzy shirt (needs to go)
2 Hawaiian shirts (need to go)
1 pair of oxford shoes
1 pair of hiking boots (made famous on the blog)
1 pair of swimming shorts
1 northface jacket (15 years old, adequate business casual although it's beginning to look worn, I've used this for everything including sailing on the Pacific in 12 feet waves ...)
1 fleece vest that zips inside it
1 down west (bought it for the ride across america ... it compresses to nothing but it's only really useful for outdoor stuff if you have a sleeping back onece it gets too cold and it's not raining)
1 filson double mackinaw coat (the pocket monster ... in this I can carry 1 kindle, 1 2m radio, 1 pair of sunglasses, 2 hats, 2 pairs of gloves, without it looking bulky ... and I usually do.)
1 balaclava, 1 neck gaiter, 1 beanie, 1 australian cowboy hat, 1 pair of finger gloves, 1 pair of pigskin gloves, 1 pair of high tech gloves...
Essentially it ranges from hiker (how I dressed in my twenties) over jeans and tshirts (how I've dressed since I was 12) and business (essentially stuff I had for rare events but which I now use daily).
[I'm kinda undecided whether to go with black turtlenecks, i.e. the Steve Jobs/hacker uniform, or go with dress shirts. I value efficiency over diversity, so I'd be happy to have everything be practically identical, e.g. 5 white dress shirts.]
===
On top of this I have 50% extra in the form of specialized hockey pants, shirt, biking shorts, sailing bib, inline skates, pfd vest, dinghy boots, ...
Speaking of which ...
My wardrobe is almost converged.
I have
4 suits (gray and navy which are used all the time, a black which is never used, and a green one which was the first one I bought 15 years ago... it's very convenient to have stayed in the same shape since I was 17).
2 dress shirts
2 mock sweaters (nice)
1 pair of 501 jeans (I find it hugely convenient to go in and buy a pair that's good enough for casual and not have to try them on or anything ... I wear out a pair in 2 years ... they fail at the knee if I do a lot of bike/woodwork and below the backpocket if I sit on my ass too much.
1 pair of hiking pants (10 yeas old ... most expensive pair of pants ever)
1 black turtleneck
1 old blue sweater (dying)
1 gray wool sweater (nice enough to be dressy, warm enough to go on the ocean... this has died and been resuscitated several times)
1 hiking shirt (water proof ... same era)
2 technical shirts (hyper sweat transporting .. also old)
~ 10 pairs of underwear and 10 pairs of socks.
3 free tshirts (they need to go)
1 fuzzy shirt (needs to go)
2 Hawaiian shirts (need to go)
1 pair of oxford shoes
1 pair of hiking boots (made famous on the blog)
1 pair of swimming shorts
1 northface jacket (15 years old, adequate business casual although it's beginning to look worn, I've used this for everything including sailing on the Pacific in 12 feet waves ...)
1 fleece vest that zips inside it
1 down west (bought it for the ride across america ... it compresses to nothing but it's only really useful for outdoor stuff if you have a sleeping back onece it gets too cold and it's not raining)
1 filson double mackinaw coat (the pocket monster ... in this I can carry 1 kindle, 1 2m radio, 1 pair of sunglasses, 2 hats, 2 pairs of gloves, without it looking bulky ... and I usually do.)
1 balaclava, 1 neck gaiter, 1 beanie, 1 australian cowboy hat, 1 pair of finger gloves, 1 pair of pigskin gloves, 1 pair of high tech gloves...
Essentially it ranges from hiker (how I dressed in my twenties) over jeans and tshirts (how I've dressed since I was 12) and business (essentially stuff I had for rare events but which I now use daily).
[I'm kinda undecided whether to go with black turtlenecks, i.e. the Steve Jobs/hacker uniform, or go with dress shirts. I value efficiency over diversity, so I'd be happy to have everything be practically identical, e.g. 5 white dress shirts.]
===
On top of this I have 50% extra in the form of specialized hockey pants, shirt, biking shorts, sailing bib, inline skates, pfd vest, dinghy boots, ...
@Jacob,
Just wanted to add one additional line to your remark, because your original is hanging off without it:
Almost everybody gets some form of subsidy -- but some subsidies are tangibly more deserving of them, than others(*).
Like the others, I have heard a lot of bitter arguments about popstars/sportsmen's salary levels in India, UK and the States as well. So, that bemusement/resentment is a clear and present trend.
You've used more reductionism language than usual in your rationalisation of what you do, eg., "computer traders get a lot of flack from pit traders because the former are essentially doing a more efficient job.". This line of approach, like the "straw man setup", makes it difficult to bring in other views because, due to the enormity of the statement, we must first falsify it before bringing the new thought in. So, too much effort and no ROI.
I also detect a hint of survivorship bias in the writings, eg., "Of course what this group should do is to become traders themselves" OR this one, "This group just need to improve their craft". Jacob, if only it was all that easy (or doable or straighforward or practical even).
With sports and music, there is a choice. You whip out your purse to buy the overpriced tickets, merchandise goods, CDs, etc. In other words, a (in)direct say in feeding some grist to the mill. The bailout of the finance crooks was a forced upon solution! Also, the idea goes against the grain of what we were brainwashed for so long that they had to invent a "too big to fail" tag to justify it. Look, I don't want to go on and on on this topic, but you get the gist of some of the different assumptions that were omitted in your very linear idea.
So yes in one sense:
traders have some social utility, but some have quantifiably more social utility than the others(*).
(*) Both statements, inspired by Orwell.
Also, systems design involving human beings, emotions, and greed in the feedback loop is neither as straightforward nor is it going to be efficient either. So, you know that it is not as straightforward as you propose it.
You also ignore the power of "comparative advantage" and the human ability to exploit this time and again -- even in algorithmic trading setups.
Another very powerful thing is situation, which is kind of a counterpoint to your entire "efficiency hypothesis". Here's one example of the power of situations and other similar backhanded manipulations that would mean that no system with humans will be "truly efficient".
The "Indian bus driver analogy" by Ha joon Chang:
Let us look at two bus drivers, Ram (Indian bus driver) and Sven (Swedish bus driver). [This example is relevant to any country and any industry].
Ram – Wage: 18 Rupees per hour
Sven – Wage: 130 Kronas per hour (~870 rupees)
The consensus in free market economics would tell us that Sven earns more money than Ram because he is just THAT much better than his Indian counterpart. Here is almost 50 times better than Ram, can that really the case? Ha Joon Chang challenges this consensus by arguing that it has nothing to do with skill, if anything, Ram who has to dodge rickshaws, cows and bullock carts is the more skilled driver, and he should therefore be earning more under the consensus. Chang concludes that protectionism is the main reason why this inequality persists, Indian bus drivers are not free to compete with their Swedish counterparts. Swedish immigration control protects the position of Swedish bus drivers relative to Indian bus drivers, similar situations can of course be observed in other successful market economies and this phenomenon is not restricted to low income industries, like bus services.
And so on it goes. But you get the overall message.
However, I don't say, we sit back, wring hands and do nothing. I appreciate the opportunity you got and feel happy that you got the opportunity to flex cranial muscles in the way few of us get to do (or at least dream about anyway).
But, there's also more randomness and chance in this than just efficiency and smarts alone.
Just wanted to add one additional line to your remark, because your original is hanging off without it:
Almost everybody gets some form of subsidy -- but some subsidies are tangibly more deserving of them, than others(*).
Like the others, I have heard a lot of bitter arguments about popstars/sportsmen's salary levels in India, UK and the States as well. So, that bemusement/resentment is a clear and present trend.
You've used more reductionism language than usual in your rationalisation of what you do, eg., "computer traders get a lot of flack from pit traders because the former are essentially doing a more efficient job.". This line of approach, like the "straw man setup", makes it difficult to bring in other views because, due to the enormity of the statement, we must first falsify it before bringing the new thought in. So, too much effort and no ROI.
I also detect a hint of survivorship bias in the writings, eg., "Of course what this group should do is to become traders themselves" OR this one, "This group just need to improve their craft". Jacob, if only it was all that easy (or doable or straighforward or practical even).
With sports and music, there is a choice. You whip out your purse to buy the overpriced tickets, merchandise goods, CDs, etc. In other words, a (in)direct say in feeding some grist to the mill. The bailout of the finance crooks was a forced upon solution! Also, the idea goes against the grain of what we were brainwashed for so long that they had to invent a "too big to fail" tag to justify it. Look, I don't want to go on and on on this topic, but you get the gist of some of the different assumptions that were omitted in your very linear idea.
So yes in one sense:
traders have some social utility, but some have quantifiably more social utility than the others(*).
(*) Both statements, inspired by Orwell.
Also, systems design involving human beings, emotions, and greed in the feedback loop is neither as straightforward nor is it going to be efficient either. So, you know that it is not as straightforward as you propose it.
You also ignore the power of "comparative advantage" and the human ability to exploit this time and again -- even in algorithmic trading setups.
Another very powerful thing is situation, which is kind of a counterpoint to your entire "efficiency hypothesis". Here's one example of the power of situations and other similar backhanded manipulations that would mean that no system with humans will be "truly efficient".
The "Indian bus driver analogy" by Ha joon Chang:
Let us look at two bus drivers, Ram (Indian bus driver) and Sven (Swedish bus driver). [This example is relevant to any country and any industry].
Ram – Wage: 18 Rupees per hour
Sven – Wage: 130 Kronas per hour (~870 rupees)
The consensus in free market economics would tell us that Sven earns more money than Ram because he is just THAT much better than his Indian counterpart. Here is almost 50 times better than Ram, can that really the case? Ha Joon Chang challenges this consensus by arguing that it has nothing to do with skill, if anything, Ram who has to dodge rickshaws, cows and bullock carts is the more skilled driver, and he should therefore be earning more under the consensus. Chang concludes that protectionism is the main reason why this inequality persists, Indian bus drivers are not free to compete with their Swedish counterparts. Swedish immigration control protects the position of Swedish bus drivers relative to Indian bus drivers, similar situations can of course be observed in other successful market economies and this phenomenon is not restricted to low income industries, like bus services.
And so on it goes. But you get the overall message.
However, I don't say, we sit back, wring hands and do nothing. I appreciate the opportunity you got and feel happy that you got the opportunity to flex cranial muscles in the way few of us get to do (or at least dream about anyway).
But, there's also more randomness and chance in this than just efficiency and smarts alone.
Traders do serve a purpose in creating markets. Unfortunately, as with lawyers, we made too many of them. Thus, they had to figure out new things to trade since there were obviously enough traders for the current stock, bond, currency, and commodities markets. So, they started making CDO's, which didn't need the "bigger" market in the first place. Now they are performing the high frequency trading, which doesn't add value to the market, but does add an extra unnecessary cost. Of course, both of these have caused negative events, but for some reason we haven't corrected these yet.
While, I will be the first one to suggest that markets are not efficient, though they are one of our better tools, the bus driver example is far too simplified. Pay is not just based on skill. It is also based on the market that person is in. The Swedish market does not have an over abundance of labor and, too my knowledge, is more expensive to live in than the Indian market. I'm not suggesting these factors should account for all of that large discrepancy in pay, but there would be a discrepancy no matter how fair it was made.
I would also suggest a different example be used, as I'm 99% sure the Swedish bus driver is a government employee and, thus, not directly in the market. If the Indian bus driver is also employeed by the government this really eliminates a good portion of market influence.
I agree that randomness, chance, etc. also effect prices in markets, which is part of the inefficiency. Also, humans control the markets, so it's impossible they are 100% efficient all the time.
While, I will be the first one to suggest that markets are not efficient, though they are one of our better tools, the bus driver example is far too simplified. Pay is not just based on skill. It is also based on the market that person is in. The Swedish market does not have an over abundance of labor and, too my knowledge, is more expensive to live in than the Indian market. I'm not suggesting these factors should account for all of that large discrepancy in pay, but there would be a discrepancy no matter how fair it was made.
I would also suggest a different example be used, as I'm 99% sure the Swedish bus driver is a government employee and, thus, not directly in the market. If the Indian bus driver is also employeed by the government this really eliminates a good portion of market influence.
I agree that randomness, chance, etc. also effect prices in markets, which is part of the inefficiency. Also, humans control the markets, so it's impossible they are 100% efficient all the time.
> the bus driver example is far too simplified.
I am just tired of writing long descriptions. I kept it simple to set a train of thought and highlight that the idea behind 'making opportunities' and 'developing skills' and 'increasing one's salaries' are not as cut-and-dried as Jacob suggested originally -- so there
.
There is always Ha Joon's speech online, and some lecture notes, and a book chapter where this whole aspect is teased out back and forth in full (if someone wants a few complicated arguments to while away their evenings).
P.S: "armoire"? from which the word "almairah" was derived, presumably?
I am just tired of writing long descriptions. I kept it simple to set a train of thought and highlight that the idea behind 'making opportunities' and 'developing skills' and 'increasing one's salaries' are not as cut-and-dried as Jacob suggested originally -- so there
. There is always Ha Joon's speech online, and some lecture notes, and a book chapter where this whole aspect is teased out back and forth in full (if someone wants a few complicated arguments to while away their evenings
).P.S: "armoire"? from which the word "almairah" was derived, presumably?
-
secretwealth
- Posts: 1948
- Joined: Mon Jun 27, 2011 3:31 am
I agree fully with Surio's detailed and well argued response, but I wanted to address one other point brought up by Chad:
"Traders do serve a purpose in creating markets. Unfortunately, as with lawyers, we made too many of them. "
I'm not so sure that it's an oversupply of traders but an undersupply of investments with a good yield. This problem really started in the 1970s, when high net worth individuals and institutions shifted away from investing in manufacturing and investing in real estate, largely thanks to Fannie Mae and government intervention in the home industry that allowed a secondary mortgage market to explode. A good article on this topic is here: http://www.nytimes.com/2012/02/01/opini ... built.html
I don't think an oversupply of traders resulted in unwieldy market products--rather, it's an oversupply of investors as wealth concentrated at the top and needed to be put somewhere that yielded capital gains. The investment banking industry expanded to fill this need.
I don't blame the traders or investors for filling that market, and I'd take a job in a hedge fund in a second if I were offered one. However, that doesn't mean that traders provide more utility or make society better. They fulfill a particular market need at this moment in society where there's a lot of money in the hands of a few people and few opportunities to invest in bridges, new factories, etc. This is quite clearly unsustainable and will probably change, although I have no idea what direction it's going to go in.
"Traders do serve a purpose in creating markets. Unfortunately, as with lawyers, we made too many of them. "
I'm not so sure that it's an oversupply of traders but an undersupply of investments with a good yield. This problem really started in the 1970s, when high net worth individuals and institutions shifted away from investing in manufacturing and investing in real estate, largely thanks to Fannie Mae and government intervention in the home industry that allowed a secondary mortgage market to explode. A good article on this topic is here: http://www.nytimes.com/2012/02/01/opini ... built.html
I don't think an oversupply of traders resulted in unwieldy market products--rather, it's an oversupply of investors as wealth concentrated at the top and needed to be put somewhere that yielded capital gains. The investment banking industry expanded to fill this need.
I don't blame the traders or investors for filling that market, and I'd take a job in a hedge fund in a second if I were offered one. However, that doesn't mean that traders provide more utility or make society better. They fulfill a particular market need at this moment in society where there's a lot of money in the hands of a few people and few opportunities to invest in bridges, new factories, etc. This is quite clearly unsustainable and will probably change, although I have no idea what direction it's going to go in.
-
aussierogue
- Posts: 379
- Joined: Thu Nov 10, 2011 1:02 pm
I am a trader and have worked for trading companies for years.
IMO the main purpose / use of trading companies is risk mitigation within an industry.
Trading companies provide an essential service that allows efficiencies and economies of scale that can leed to lowed prices.
It is ofetn "too risky" or too far outside the skillset of a manufacturer (who core business is manufacturing) to grow industries to an optimal level.
Traders buy and sell but they also pull together, find efficiencies.
Traders become a problem when "speculation' happens.
Speculation is when the core thing that is being traded is immaterial.
With regards to derivative trading compared to physical trading, bizarrely the derivtives markets tend to be many times the size of the actual physical market they are supposed to be mirroring....
Thats is smoke and mirrors at its best. Derivitve trading should be about hedging the physical markets........but now it has been taken over by speculators with fibonacci calculators.
IMO the main purpose / use of trading companies is risk mitigation within an industry.
Trading companies provide an essential service that allows efficiencies and economies of scale that can leed to lowed prices.
It is ofetn "too risky" or too far outside the skillset of a manufacturer (who core business is manufacturing) to grow industries to an optimal level.
Traders buy and sell but they also pull together, find efficiencies.
Traders become a problem when "speculation' happens.
Speculation is when the core thing that is being traded is immaterial.
With regards to derivative trading compared to physical trading, bizarrely the derivtives markets tend to be many times the size of the actual physical market they are supposed to be mirroring....
Thats is smoke and mirrors at its best. Derivitve trading should be about hedging the physical markets........but now it has been taken over by speculators with fibonacci calculators.
@secretwealth,
All good points. It builds on the mounting criticism of the flawed but widely misunderstood, and widely misused "comparative advantage" theory from classical economics. Heteredox economics is trying to address this.
You are right. Where it goes from here is anybody's guess.
Be prepared for more rationalisations of why "this is how it must be done" though! Sigh |-(
@aussierogue,
Thank you for the good moderation answer. "but now it has been taken over by speculators with fibonacci calculators." -- I chuckled at that statement.
All good points. It builds on the mounting criticism of the flawed but widely misunderstood, and widely misused "comparative advantage" theory from classical economics. Heteredox economics is trying to address this.
You are right. Where it goes from here is anybody's guess.
Be prepared for more rationalisations of why "this is how it must be done" though! Sigh |-(
@aussierogue,
Thank you for the good moderation answer. "but now it has been taken over by speculators with fibonacci calculators." -- I chuckled at that statement.
I took most of Jacob's argument to be that computers and quants are better at performing the same job as traders used to perform. And this is absolutely true.
I don't know if you've met many traders, but by and large, they're simply not very smart. Entire trading floors have so little human alpha that they can be replaced by a few servers with negligible impact. Computers can do the same thing as 95% of traders - except faster, more accurately, and better.
As for the broader social utility of traders/trading, I think there is none. Yes, high frequency or even general algorithmic trading increases liquidity. But there's a point of diminishing returns for liquidity. On the other hand, I don't think that high-frequency trading has any pernicious effects. I simply think it's socially neutral.
I guess it's lamentable that traders and quants are paid more than teachers or whomever, but the fact of the matter is that jobs don't pay by social utility, but rather by how much they earn in profits combined with how unwilling or unable people are to do them.
I don't know if you've met many traders, but by and large, they're simply not very smart. Entire trading floors have so little human alpha that they can be replaced by a few servers with negligible impact. Computers can do the same thing as 95% of traders - except faster, more accurately, and better.
As for the broader social utility of traders/trading, I think there is none. Yes, high frequency or even general algorithmic trading increases liquidity. But there's a point of diminishing returns for liquidity. On the other hand, I don't think that high-frequency trading has any pernicious effects. I simply think it's socially neutral.
I guess it's lamentable that traders and quants are paid more than teachers or whomever, but the fact of the matter is that jobs don't pay by social utility, but rather by how much they earn in profits combined with how unwilling or unable people are to do them.
@m741,
> I took most of Jacob's argument to be that
> computers and quants are better at performing the
> same job as traders used to perform.
I (and the others too, I suspect) took it to be the same as well. And, like I objected first, it is very reductionist. Going forward with that premise, computers/machines will always be good at doing what (most) humans can do (and therefore replace them). So, what happens to the rest of us (i.e, Humans) then? Schumpeterian "creative destruction" doesn't scale *that* well, nor will "Human creativity" find "something" to save us all. And that was the point I made. All great on paper, but in this case, the sum of the parts adds up to more than the whole. So, sorry, the argument doesn't work like the way it is being framed.
Pick your sci-fi scenario for some imaginative wanderings on the extension of computers replacing humans in every endeavour that humans are not very 'efficient' in doing. Some samples:
1. Brave New World
2. Eloi vs. Morlocks (or the retold versions Matrix/Terminator)
3. Some others I may have forgotten
> I don't know if you've met many traders, but by and
> large, they're simply not very smart.
This is dangerous ground. They're not very smart, but with respect to what? AFAIK, most expert systems and computer software (not necessarily trading software) depend on the internalised rules of thumbs of actors(or users or players) for interaction, performance, rules and algorithms.
Anyway, the corollary to your point is that we are all to some degree or the other not very smart either (when compared to someone else, that is) and therefore replaceable at the first instance of an alternative. Like the one above, not the right step for humans in general.
Also what makes it dangerous is that deciding on smarts is both relative and subjective. You know what I am saying, right? I won't stretch this point further.
Please note that I am not exactly making a case for traders here. I am simply raising a few flags about the framing of the arguments, first in the case of Jacob and now, yourself.
> I don't think that high-frequency trading has any
> pernicious effects. I simply think it's
> socially neutral.
There is a well researched and a very dense report by the UNESCO which clearly links speculative trading in all the markets (commodities in particular) to all the turmoil and churn in the markets since 2005-2006 up until now.
> I took most of Jacob's argument to be that
> computers and quants are better at performing the
> same job as traders used to perform.
I (and the others too, I suspect) took it to be the same as well. And, like I objected first, it is very reductionist. Going forward with that premise, computers/machines will always be good at doing what (most) humans can do (and therefore replace them). So, what happens to the rest of us (i.e, Humans) then? Schumpeterian "creative destruction" doesn't scale *that* well, nor will "Human creativity" find "something" to save us all. And that was the point I made. All great on paper, but in this case, the sum of the parts adds up to more than the whole. So, sorry, the argument doesn't work like the way it is being framed.
Pick your sci-fi scenario for some imaginative wanderings on the extension of computers replacing humans in every endeavour that humans are not very 'efficient' in doing. Some samples:
1. Brave New World
2. Eloi vs. Morlocks (or the retold versions Matrix/Terminator)
3. Some others I may have forgotten
> I don't know if you've met many traders, but by and
> large, they're simply not very smart.
This is dangerous ground. They're not very smart, but with respect to what? AFAIK, most expert systems and computer software (not necessarily trading software) depend on the internalised rules of thumbs of actors(or users or players) for interaction, performance, rules and algorithms.
Anyway, the corollary to your point is that we are all to some degree or the other not very smart either (when compared to someone else, that is) and therefore replaceable at the first instance of an alternative. Like the one above, not the right step for humans in general.
Also what makes it dangerous is that deciding on smarts is both relative and subjective. You know what I am saying, right? I won't stretch this point further.
Please note that I am not exactly making a case for traders here. I am simply raising a few flags about the framing of the arguments, first in the case of Jacob and now, yourself.
> I don't think that high-frequency trading has any
> pernicious effects. I simply think it's
> socially neutral.
There is a well researched and a very dense report by the UNESCO which clearly links speculative trading in all the markets (commodities in particular) to all the turmoil and churn in the markets since 2005-2006 up until now.